The Beauty Health Company (Nasdaq: SKIN) — Q3 2021 Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2021. The filing identifies the registrant as The Beauty Health Company, formerly Vesper Healthcare Acquisition Corp.; the request metadata refers to Skinhealth Systems Inc. The company develops, manufactures, markets and sells aesthetic technologies and products, primarily HydraFacial Delivery Systems and related Consumables.
Business Context and Reporting Period
- The May 4, 2021 business combination with HydraFacial was accounted for as a reverse recapitalization; the financial statements are a continuation of HydraFacial for accounting purposes.
- Four international distributor acquisitions were completed in Australia, France, Germany and Mexico during June and July 2021.
- Revenue is generated from Delivery Systems, which establish the installed base, and recurring Consumables such as serums, tips and boosters. The company operated as one reportable segment and distributed products in 87 countries.
Financial Performance
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|
| Net sales | $68.1 million | $34.6 million | $182.2 million | $81.2 million |
| Gross profit | $46.1 million | $21.0 million | $125.1 million | $44.2 million |
| Gross margin | 67.6% | 60.6% | 68.6% | 54.4% |
| Operating loss | $5.5 million | Operating income of $2.8 million | $29.4 million | $12.5 million |
| Net loss | $215.1 million | $2.2 million | $357.8 million | $21.7 million |
| Adjusted EBITDA | $5.8 million | $7.6 million | $24.2 million | $4.2 million |
| Adjusted EBITDA margin | 8.5% | 21.9% | 13.3% | 5.1% |
- Q3 Delivery Systems sales increased 127.2% to $36.2 million; Consumables increased 71.5% to $32.0 million.
- For the first nine months, Delivery Systems sales increased 169.0% to $96.8 million and Consumables increased 88.8% to $85.4 million.
- Operating expenses rose materially, including selling and marketing expense of $30.5 million in Q3 and general and administrative expense of $19.2 million. Nine-month general and administrative expense included approximately $32.3 million of transaction-related costs, including $21.0 million paid to the former owner.
- GAAP net loss was heavily affected by non-cash fair-value losses of $199.3 million on warrant liabilities and $10.6 million on the earn-out shares liability in Q3. For the nine months, these losses were $271.3 million and $47.1 million, respectively.
- Adjusted net income was $2.5 million in Q3 and $2.8 million for the nine months, compared with $0.9 million and an adjusted loss of $10.3 million in the comparable periods.
Cash Flow, Debt and Liquidity
| Metric | September 30, 2021 | December 31, 2020 |
|---|
| Cash and cash equivalents | $718.6 million | $9.5 million |
| Total assets | $997.9 million | $222.8 million |
| Convertible senior notes, net | $728.9 million | None reported |
| Warrant liabilities | $357.2 million | None reported |
| Stockholders’ deficit | $142.1 million | $30.0 million |
- Nine-month operating cash flow was negative $31.6 million, compared with negative $12.0 million in 2020. Investing cash flow was negative $29.2 million, including $22.9 million for acquisitions.
- Financing cash flow was $770.8 million, primarily from $750.0 million of convertible notes and $357.8 million of net business-combination proceeds, partly offset by debt repayment, capped-call purchases and issuance costs.
- On September 14, 2021, the company issued 1.25% convertible senior notes due 2026. The initial conversion price was approximately $31.76 per share. The company also paid $90.2 million for capped-call transactions intended to reduce potential dilution.
- Management stated that cash, cash equivalents and expected operating cash flow should be sufficient for working capital and capital expenditures for at least the next 12 months. Capital expenditures for full-year 2021 were expected to be up to $15.0 million.
Material Changes, Outlook and Risks
- Revenue rebounded strongly as markets reopened after COVID-19 restrictions, but management cited continuing risks from facility closures, consumer behavior, supply-chain disruption, labor constraints and Delta-variant-related interruptions.
- Management expects continued investment in sales and marketing, research and development, international expansion, technology and public-company infrastructure. These investments are expected to increase expenses in absolute dollars.
- The company expects long-term improvement in Adjusted EBITDA margin and Adjusted gross margin as the installed base expands and recurring Consumables revenue grows, but no specific full-year revenue or earnings guidance was provided.
- Public-company costs, stock-based compensation, transaction expenses and acquisition integration affected 2021 results. Four distributor acquisitions generated $25.3 million of goodwill and preliminary purchase accounting remained subject to finalization.
- On October 4, 2021, the company announced redemption of its public warrants. By November 8, 2021, 16.1 million warrants had been exercised for $185.4 million of cash proceeds, with approximately 99.5% of public warrants addressed.
- Management disclosed material weaknesses in internal control over financial reporting, including accounting resources, segregation of duties, journal-entry review and risk assessment. Disclosure controls were not effective as of September 30, 2021, and remediation was ongoing.
- Key risks include COVID-19, competitive and regulatory pressures, FDA-related uncertainty, acquisition integration, foreign-currency exposure, potential future dilution, debt repayment or refinancing risk, and the possibility that growth does not translate into sustained GAAP profitability.
Important Facts for Investors to Verify
- Whether post-pandemic revenue growth and Consumables repeat purchasing remain durable after reopening-related comparisons normalize.
- The magnitude and timing of future dilution from the convertible notes, warrants, earn-out shares and equity compensation.
- Progress in remediating the disclosed material weaknesses and whether subsequent filings conclude that controls are effective.
- The company’s ability to convert strong revenue growth and Adjusted EBITDA into positive GAAP operating income and cash flow.
- Integration results and final purchase accounting for the four distributor acquisitions.
- Compliance with the convertible-note indenture and the company’s ability to repay or refinance the $750 million principal amount due in 2026.
